On December 19, 2019, the Treasury Department and IRS released final opportunity zone regulations. The release comes just days before the end of the year, which is the deadline for investing into a qualified opportunity fund (“QOF”) and potentially obtaining the 15% discount on the deferred gain. After the end of 2019, the opportunity zone program still offers very attractive tax benefits, but the maximum discount on deferred gain is reduced to 10%.
The entire treasury decision is over 500 pages long. The final regulations largely adopt the rules of the previous two sets of proposed regulations, with some modifications.
Some of the highlights in the final regulations include:
- Section 1231 Property – The proposed regulations only allowed net (after section 1231 loss offset) section 1231 gain to qualify for opportunity zone benefits. The final regulations allow the entire amount of the section 1231 gain to be invested, with no netting.
- Installment sales – Installment sale gain (even from a pre-Tax Cuts and Jobs Act transaction) may qualify for investment into a QOF.
- Nonresident aliens and foreign corporations may take advantage of opportunity zone benefits if they have capital gains that are effectively connected to a U.S. trade or business.
- Substantial improvement test – Two or more buildings may be aggregated for purposes of determining whether substantial improvement is satisfied. After aggregation, the basis in each separate building does not need to be increased by 100%, only the basis in the group of buildings.
- Original use – Generally property needs to satisfy an original use test or must be substantially improved in order to qualify as opportunity zone property. The proposed regulations had a 5 year vacancy requirement, whereby if a building was vacant for 5 years, it did not need to be substantially improved. The vacancy period has been reduced to 3 years. An even shorter period of vacancy is allowed if the property was vacant for at least one year prior to being in a designated opportunity zone, and the property remained vacant through the date of purchase by a qualified opportunity zone business (“QOZB”) or QOF.
- C Corporation Consolidated Groups – A consolidated group of C corporations may treat a lower-tier C corporation QOF as a member of its consolidated group.
- Creation of a new safe harbor – The final regulations provide for a 62 month safe harbor for start-up businesses. If the safe harbor is satisfied, various opportunity zone rules will be deemed to be satisfied (g. the 70% test, limits on nonqualified financial property (cash), etc.)